Speaking of...
The term entrepreneur, which most people recognize as meaning someone who organizes and assumes the risk of a business in return for the profits, appears to have been introduced by
Richard Cantillon (1697-1734), an Irish economist of French descent. The term came into much wider use after
John Stuart Mill popularized it in his 1848 classic,
Principles of Political Economy, but then all but disappeared from the economics literature by the end of the nineteenth century.
The reason is simple. In their mathematical models of economic activity and behavior, economists began to use the simplifying assumption that all people in an economy have perfect information (see
Information). That leaves no role for the entrepreneur. Although different economists have emphasized different facets of entrepreneurship, all economists who have written about it agree that at its core entrepreneurship involves judgment. But if people have perfect information, there is no need for judgment. Fortunately, economists have increasingly dropped the assumption of perfect information in recent years. As this trend continues, economists are likely to allow in their models for the role of the entrepreneur. When they do, they can learn from past economists, who took entrepreneurship more seriously.
According to Cantillon's original formulation, the entrepreneur is a specialist in taking on risk. He "insures" workers by buying their products (or their labor services) for resale before consumers have indicated how much they are willing to pay for them. The workers receives an assured income (in the short run, at least), while the entrepreneur bears the risk caused by price fluctuations in consumer markets.
This idea was refined by the U.S. economist
Frank H. Knight (1885-1972), who distinguished between risk, which is insurable, and uncertainty, which is not. Risk relates to recurring events whose relative frequency is known from past experience, while uncertainty relates to unique events whose probability can only be subjectively estimated. Changes affecting the marketing of consumer products generally fall in the uncertainty category. Individual tastes, for example, are affected by group culture, which, in turn, depends on fashion trends that are essentially unique. Insurance companies exploit the
law of large numbers to reduce the overall burden of risks by "pooling" them. For instance, no one knows whether any individual forty-year-old will die in the next year. But insurance companies do know with relative certainty how many forty-year-olds in a large group will die within a year. Armed with this knowledge, they know what price to charge for life insurance, but they cannot do the same when it comes to uncertainties. Knight observed that while the entrepreneur can "lay off" risks much like insurance companies do, he is left to bear the uncertainties himself. He is content to do this because his profit compensates him for the psychological cost involved.
If new companies are free to enter an industry and existing companies are free to exit, then in the long run entrepreneurs and capital will exit from industries where profits are low and enter ones where they are high. If uncertainties were equal between industries, this shift of entrepreneurs and of capital would occur until profits were equal in each industry. Any long-run differences in industry profit rates, therefore, can be explained by the different magnitudes of the uncertainties involved.
Further reading...